So, goes the first week of the year, so goes the year is an old stock market adage. Last year’s stock market performance took many by surprise as most equity markets entered bear market territory by the end of the year. A recovery this year may take many by surprise as well. A strong rebound in equity markets on Friday is driven by the S&P 500 and the NASDAQ index assured the first week of the year was a positive one.
The week started in the same vein as the year ended as Apple lowered its revenue forecasts on China sales concerns and some disappointing Purchasing Manager survey data from the Chinese economy. This with the US ISM manufacturing report which was well below consensus adding to the uncertainty at the start of the week. According to some broker surveys, equity investors far from euphoric were starting to panic. Fear was taking over greed, often the catalyst for a bounce. The impetus for the turn round in sentiment was stable jobs data on Friday along with the Fed chairman Jerome Powell suggesting the Fed would be flexible when it came to monetary policy as well as continuing to provide a positive view on the current health of the US economy. The market is now putting the possibility of a rate cut this year from the Federal Reserve at greater than 50%. This is despite the Federal Reserves current declared intention to raise twice more in the coming 12 months.
As we start the year forecasts are for the US economy to grow circa 2.5% this year, the global economy by 3.5% and US corporate earnings by 8% year on year. That should provide a favourable backdrop for equity markets, at present, this does not appear to be where sentiment lies. Fears on the impact Brexit could have on trade along with the tariff negotiations between China and America the main investor concerns at this time. Equity investors mostly ignore the US government shutdown over disagreements on funding a barrier between Mexico and the US.
The next big hurdle for equity markets will be the upcoming fourth-quarter earnings season, due to start on the 14th of January. According to FactSet research analysts have lowered earnings estimates for companies by 3.8% for the fourth quarter. As expectations have been reduced, the question remains whether it is enough? Lowering of expectations makes them easier to be delivered upon.
The coming week has plenty of news to influence both equity and bond investors alike. The minutes of the last Fed meeting will be released. This may give a further indication of the Federal Reserve’s interest rate path intentions. As one of the Federal Reserve’s central mandates Is price stability, US inflation data this week will also be necessary. As Brexit will once again start to make more headlines, this week the ONS will release monthly GDP figures, alongside industrial production, construction output, trade balance and final figures of third-quarter labour productivity.